This one was closely watched. As a mid-sized broker-dealer, banker and wealth manager, Charles Schwab (SCHW) stock had become extremely volatile in early March, and had stabilized of late. On Monday morning, investors finally heard about the firm's first quarter, which ended on March 31st... and what comes next.
For the first quarter, Schwab posted adjusted EPS of $0.93 (GAAP EPS: $0.83) on revenue of $5.116B. The adjusted bottom line number exceeded expectations. However, despite printing a number that was good enough for year over year growth of 9.6%, the top line number fell short of what Wall Street was looking for.
Looking Within
For the period, Schwab generated interest revenue of $4.016B (+73%). Out of that comes interest expense of $1.246B (+816%). This still left net interest income at $2.77B, which was up 27% from the year ago comp. Trading revenue decreased 7.4% to $892M, as deposit account fees dropped 48.6% to $151M.
Total expenses ex-interest such as compensation and benefits, professional services, occupancy, etc., added up to $3.006B (+6.1%). After taxes, this left the firm with net income of $1.603B (+20%). This works out to the GAAP print of $0.83 per share. The net ten cents worth of adjustments were primarily due to the amortization of acquired intangible assets and acquisition/integration related expenses.
Now for the statistics you probably were looking for. Until now, what is obvious is that on balance, Schwab had a rather strong quarter, and was able to boost income despite slower growth in revenue. What becomes clear now, is that investors and depositors who bank with or conduct business through Schwab were rattled as the turmoil centered around regional banks in aggregate after a couple of notable failures, did not leave Schwab unscarred.
Total interest earning assets experienced a 20.2% decrease to $504.6B, while bank deposits decreased by 11% sequentially and 30% from a year ago to $325.7B. Average deposit balance for the quarter had totaled $343.105B, so this line appears to have ended the quarter on a weak note.
Halting The Buyback
CFO Peter Crawford commented in the press release: "Maintaining the capital and liquidity required to support Schwab's long-term growth remains our primary balance sheet objective. We increased our quarterly common dividend by 14% to $.25 per share and returned capital via common and preferred stock repurchases. Even with the accelerated capital return during the first two months of the quarter, our Tier 1 Leverage Ratio finished at 7.1%.
In light of recent events within the US banking sector, and the resulting regulatory uncertainty, we have decided to pause our active buyback program. That being said, opportunistic capital return is still an important component of our 'through the cycle' financial formula."
My Thoughts
This report was better than expected in terms of performance and not as lousy as feared in terms of the impacts of March on the less large U.S. banks. Buying a stock where the company just told you that they put their buyback program on hold is difficult. I would not be a buyer of this stock even if I loved it, until this news sinks in. Investors are not going to like that, but it does make sense at this time.
What's important to those long SCHW right now is that the $48 low of early April holds. Yes, I see that one-day wick in early March that touched the $45 level. That was what I see as an algorithmic overshoot on a volatile day. I would not consider that to be the honest recent low. Relative strength has been soft, but the stock has not been truly technically oversold since that spike that I am ignoring.
The daily MACD (Moving Average Convergence Divergence) has started to show that it may have put in a bottom. The 12-day EMA (exponential moving average) has crossed nicely over the 26-day EMA. Both come in deeply negative though, so I can't see this as bullish, just that the stock has tried to put in a bottom.
A 31.8% retracement of the March into April selloff would put the stock back up above $62. That might be a longer-term target for those still in the stock. That said, it becomes ever more difficult to determine if this economy is headed into a period of economic contraction and if we are, that tends to damage financial stocks before they trough.
If I were long this stock, I would probably go out three months and think about putting on a bear put spread. For example (premiums will vary), I would think about purchasing one July $50 put for every 100 shares held and selling a like number of July $40 puts if I could get the whole set-up on for a net debit of less than $3.
The idea is that one adds $3 to the net basis of the equity stake, thus further damaging already damaged net basis, but at least reduced that outlay by being willing to reopen that equity risk at $40 this summer. This protects the investor, technically, with a $47 out price and saves that investor $7 worth of pain if forced to reenter in July.
